AssetBuilder Inc. Registered Investment Advisor - Simple Investing. Smart Future.

Dear Scott,

I am 60 years old and the only employee of a sub-s corportation that nets $150,000. annually. I take an annual salary of $30,000 which is adequate because  my home is paid for and I have no debt. I have an SEP brokerage account to which I contribute the maximum allowed of $7500. annually. This account has a balance of $85000. I contribute most of the sub-s eanings after taxes to a brokerage account. This account has $550,000. Until recently, both held 100% equities.

Due to my age, I want to diversify these accounts. Most advisors recommend a 60/40 mix equities/bonds. Since bonds belong in a tax-deferred account, I converted my entire SEP account to a mix of TIP, BND and BWX. However, this is only  about 13% of my portfolio. If bonds don't belong in a taxable account, how do you think I should diversify this account? I want to use ETF index funds.

I plan to continue to work for several more years earning about the same income.

Jim in Dallas

Jim,

You'll probably sleep better if you keep some of the money in your taxable account in either taxable cash or in tax-free cash money market funds. Although the amount you can invest is limited, you could also start putting some of your taxable money into I Savings Bonds where the interest will be accumulated tax-deferred.

Many small business owners do the same thing you do, suppress wage earnings in favor of dividend distributions. It is a much-used way to avoid the employment tax. Unfortunately, both the Treasury and the IRS are well aware of this and are likely to frown on obvious cases of wage income suppression in the future. So I suggest a good talk with your accountant about setting a more realistic wage level.

While it will cause you to pay more in employment taxes, you could counter that tax increase by substantially increasing your SEP contributions.

Scott

Jim,

One thing that you might consider is a self directed defined BENEFIT pension plan.  It works very much like a self directed IRA at a brokerage firm, but there is far more govt. paperwork, and it is expensive to set up and maintain.  (About $2,000 for initial setup, and $1,000 for annual reports.)  You would need an actuary who specializes in single person S-Corp. pensions, and a brokerage firm as custodian.  I know that Schwab handles them, but that USAA did not as of about seven years ago. 

Scott, is your firm set up to handle this type of account?

The advantage is that it allows you to set aside, tax deferred, a much greater amount of money each year, quite possibly double your salary for somebody your age.  This also sidesteps most of the social security tax problem.  This might actually bring your IRS AGI down low enough to qualify for a Roth IRA in addition to the retirement plan. 

 The rules on these pension plans are actually quite loose, and a creative accountant will change the assumptions each year to fit the amount of money that you wish to stash in the pension plan that year.

Bryan